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Core & Main LP -- Moody's affirms Core & Main's CFR; downgrades term loan rating to B1

Rating Action: Moody's affirms Core & Main's CFR; downgrades term loan rating to B1Global Credit Research - 18 Aug 2022New York, August 18, 2022 -- Moody's Investors Service ("Moody's") affirmed Core & Main LP's (Core & Main) Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR). Moody's downgraded the senior secured first lien term loan rating of Core & Main to B1 from Ba3. The company's speculative grade liquidity rating is unchanged at SGL-1. The rating outlook is stable."The downgrade of the term loan reflects weakened recovery for that class of debt, which now comprises a lower share of the overall capital structure following an upsize of the ABL revolver (unrated) to $1.25 billion," said Griselda Bisono, Moody's Vice President – Senior Analyst. "The B1 rating of the company's $1.5 billion term loan is one notch below the CFR, despite the term loan's first lien on substantially all assets not pledged to the revolver, because the ABL has a first lien priority on the relatively more liquid ABL collateral, including accounts receivable, inventory, deposit accounts and cash, resulting in the subordination of the term loan creditors," added Bisono.The affirmation of the CFR reflects Moody's expectations of continued strong credit metrics through fiscal 2023, including debt / EBITDA trending to 2.1x.The stable outlook reflects Moody's expectations that Core & Main will continue to grow both organically as well as through tack-on acquisitions while maintaining solid operating margins above 7.5%. The stable outlook also reflects maintenance of very good liquidity.Affirmations:..Issuer: Core & Main LP.... Corporate Family Rating, Affirmed Ba3.... Probability of Default Rating, Affirmed Ba3-PDDowngrades:..Issuer: Core & Main LP ....Senior Secured Bank Credit Facility, Downgraded to B1 (LGD4) from Ba3 (LGD4) Outlook Actions: ..Issuer: Core & Main LP ....Outlook, Remains Stable RATINGS RATIONALE The Ba3 CFR reflects Core & Main's position as one of the top water products distributors in the US with a diversified product offering, large customer base and strong end market fundamentals. Moody's expects solid revenue growth over the next two years as the municipal end market and, to a lesser extent, the non-residential end market benefit from the recently passed Infrastructure Investment and Jobs Act, which will provide long-term federal financing for infrastructure projects in the US. The residential end market will experience slower growth over the next two years after stronger than normal performance following COVID pandemic lockdowns. Moody's expects operating margins will remain strong between 9-10%, bolstered by the company's private label offerings, better pricing initiatives and driving SG&A productivity. These factors are counterbalanced by the cyclical nature of Core & Main's end markets as well as the company's exposure to commodity pricing, specifically those used to produce PVC pipe and ductile iron pipe products, which can create cash flow volatility. Furthermore, the rating is constrained due to ownership concentration by private equity firm CD&R, which controls about 70% of the total voting power. Concentrated decision making creates the potential for event risk and decisions that favor shareholders over creditors.Core & Main's SGL-1 rating reflects Moody's expectation of very good liquidity over the next 12 to 18 months and considers strong positive free cash flow between $400-500 million annually in both fiscal 2022 and fiscal 2023. Liquidity is supported by a $1.25 million ABL facility due 2026 that is expected to remain largely available.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA ratings upgrade would require improved governance through the reduction in CD&R's ownership and influence over Core & Main. In addition, upward ratings movement would reflect debt-to-EBITDA below 3.0x and RCF-to-debt closer to 18% while maintaining of very good liquidity.A ratings downgrade could result should the company experience a meaningful deterioration in credit metrics, including debt-to-EBITDA sustained above 4.0x, a significant contraction in EBITDA margin and low or negative free cash flow. The engagement in debt-funded acquisitions or shareholder distributions could also lead to a ratings downgrade.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://ratings.moodys.com/api/rmc-documents/55403. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Core & Main LP, headquartered in Saint Louis, Missouri, is a US based distributor of water, sewage, drainage, storm water, and fire protection products. Revenue for the twelve month period ended May 1, 2022 was $5.5 billion.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Griselda Bisono Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Gretchen French Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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